A stock's price is $20 at the beginning of a year.There is a 25 percent chance that the price will be $17 at the end of the year, and a 75 percent chance that the price will be $25 at the end of the year.The stock will pay a dividend of $3 during the year.The expected return on the stock is _____percent.

Question

Quizplus · Accepted Answer

To find the expected return on the stock, we need to calculate the expected price at the end of the year, including the dividend.

The expected price at the end of the year is calculated as follows:

Expected price = (probability of price change * new price) + (probability of no change * old price)
              = (0.25 * 17) + (0.75 * 25)
              = 20.5

Adding the dividend of $3 to the expected price, we get:

Expected total return = (Expected price + Dividend) / Initial price - 1
                     = (20.5 + 3) / 20 - 1
                     = 28%

Therefore, the best choice is C, with an expected return of 30%.

A Stock's Price Is $20 at the Beginning of a Year.There